Central Bank advocates different bank-capital requirements

The Central Bank of Russia suggests changing bank-capital requirements.

The Central Bank, which advocates substantial changes in current Russian legislation for the sake of implementing specific approaches being stipulated by the new Basel II agreement on assessing capital-sufficiency levels, intends to clarify this program's organizational framework already in the near future.

The full-fledged implementation of the Basel II agreement's approaches is impossible, unless present-day Russian legislation is modified considerably, reads a Central Bank press release. Such changes must formalize the right of supervision agencies to implement their professional-judgement method. Moreover, all banks would be expected to publish additional information about their capitals, risks and risk-management systems.

The Central Bank intends to define this program's organizational framework in the near future, also moving to implement it, the document reads in part. The Central Bank intends to closely cooperate with all the concerned parties, the banking community, first and foremost, while drafting and implementing national provisions of the Basel II agreement on Russian territory, the document goes on to say.

The new Basel II agreement on assessing capital-sufficiency levels offers new standards for defining minimal bank-capital requirements. This agreement was drafted by the Basel Committee for supervising banking operations, as well as by central banks and banking supervision agencies from the Group of Ten countries, which had finalized the 1988 Basel I agreement.

The 1988 capital-sufficiency agreement had stipulated the first-ever internationally recognized banking-capital definition, stipulating their minimal values all the same. That agreement stipulates the relevant bank-capital requirements in line with rather vague categories, nonetheless overlooking the relative solvency of separate borrowers.

Supervision agencies, as well as the most experienced and advanced banks, now believe that time is ripe for introducing new bank-capital standards because the 1988 agreement's regulations don't match current cost-effective management practices.

The Basel II agreement aims to expand the entire system for managing banking risks, as well as the entire bank-supervision system. Specific agreement-implementation approaches hinge on the one-size-doesn't-fit-all principle. This agreement combines the afore-said minimal bank-capital requirements, capital-sufficiency supervision procedures, as well as demands on publishing information for the sake of enhanced market discipline. All this will help expand and streamline the risk-management system.

As far as the Basel II agreement's deadlines are concerned, the Basel Committee, as well as international financial institutions (including the International Monetary Fund and the World Bank), suggest tackling this issue with due account taken of national supervision-agency priorities and potentials as regards expanded supervision and measures to strengthen the banking sector.